The 2020 Financial Crash

Now at NEGATIVE $11. 

Frame the screen shots for posterity.

Y'all can fill my garage with barrels at $11 a pop.

posted by justincredible

Y'all can fill my garage with barrels at $11 a pop.

The barrels will cost more than what’s inside. 

If the “China created this in a lab as a weapon” conspiracy theorists weren’t loud before, they’re practically screaming now. 
 

The only question was “but why would they do it?” And it seems like now they have their answer. Collapse other countries economies by attacking a commodity that they don’t export. 

Hit NEGATIVE $40

Hopefully the June contract fares better, if we can get things rolling soon.

Can someone explain to me how a negative value even works?

posted by O-Trap

Can someone explain to me how a negative value even works?

It stops production

posted by SportsAndLady

It stops production

Well yeah.  But regarding what's already in existence, how does that work?

posted by O-Trap

Well yeah.  But regarding what's already in existence, how does that work?

Price is just an arbitrary number. It can get worse than zero because zero is an arbitrary number. 

posted by SportsAndLady

Price is just an arbitrary number. It can get worse than zero because zero is an arbitrary number. 

Ah, okay.  I never realized it was completely arbitrary.  I always thought it correlated to something in an objective way.

posted by O-Trap

Ah, okay.  I never realized it was completely arbitrary.  I always thought it correlated to something in an objective way.

Arbitrary in a financial sense. Like the Dow being at 23,000 is arbitrary. Traders on a commodity market set the price of oil futures by their bids/asks. It’s not actually the price of a barrel of oil in present day, it’s a forecast of future trading price. 
 

posted by O-Trap

Well yeah.  But regarding what's already in existence, how does that work?

You're basically paying people to take it off your hands because you have nowhere to put it.

It's supply and demand.  There are no buyers, so sellers are paying people to take it.  Not every well has an off switch, I don't think.

But it is a contract that trades, so there is a buyer and a seller.  Today is the last day for the May contract, and you have producers essentially paying to have the oil taken off their hands. Most likely a one-day anomaly, but we’ll see what the June trading looks like.

posted by SportsAndLady

Crude oil down over FIFTY percent today. It’s under $9 a barrel. Crazy, crazy crash of the oil industry. 
...And I just bought a ton of oil drilling stocks. Buy low

Could be a great buy, assuming they don't go bankrupt before prices rebound.  Sounds like you looked at debt and cash, though.  Finding their break-even price per barrel is probably a lot tougher - oil stays below $25 for a year and that's going to bankrupt a lot of drillers.

posted by gut

Could be a great buy, assuming they don't go bankrupt before prices rebound.  Sounds like you looked at debt and cash, though.  Finding their break-even price per barrel is probably a lot tougher - oil stays below $25 for a year and that's going to bankrupt a lot of drillers.

I love DO. I have a bit too much of them, lol. 
They have enough cash to last, and just restructured their debt. If oil comes back, which it should once we reopen and planes can start flying again, I should get paid out nicely on that one. 

posted by ptown_trojans_1

Yeah, at least for the short term, it looks like now the price of gas will be the federal gas tax plus whatever is your state and local gas tax.

Plus the actual cost of production.  Still costs money to refine into gasoline and ship it to the station.  I can't remember how the taxes work - I think some are fixed and others are a % of price.

posted by O-Trap

 I always thought it correlated to something in an objective way.

Yes, it definitely does.  Supply and demand, along with complex valuation models.  People have different estimates for the unknowns, and that's what creates a trading market.  There are many valuation methods, obviously none are perfect but discounted cash flow models are most common.  That's not an arbitrary thing, beyond making assumptions about what those future cash flows project to.

posted by gut

Yes, it definitely does.  Supply and demand, along with complex valuation models.  People have different estimates for the unknowns, and that's what creates a trading market.  There are many valuation methods, obviously none are perfect but discounted cash flow models are most common.  That's not an arbitrary thing, beyond making assumptions about what those future cash flows project to.

Arbitrary in the sense of how the cost of crude futures can go negative. Obviously the price they trade on is not picked out of thin air, but a measure of their data. 

posted by SportsAndLady

I love DO. I have a bit too much of them, lol. 
They have enough cash to last, and just restructured their debt. If oil comes back, which it should once we reopen and planes can start flying again, I should get paid out nicely on that one. 

Interesting.  I still think it's an implicit bet on the future price of oil, which would actually be an implicit bet on economic growth.  Future prices are $30-$35 by end of summer, so I think that looks like some degree of recession priced in but impossible for me to say.

I don't mess around with individual names because I don't even know what growth assumption is baked in to bet on.  If I look at the broad overall market right now, I have no idea.  I don't think 20% off highs reflects the uncertainty and risk still out there, but it might if you factor in dropping $6T from a helicopter.

posted by gut

Yes, it definitely does.  Supply and demand, along with complex valuation models.  People have different estimates for the unknowns, and that's what creates a trading market.  There are many valuation methods, obviously none are perfect but discounted cash flow models are most common.  That's not an arbitrary thing, beyond making assumptions about what those future cash flows project to.

Okay, good.  Truthfully, it wouldn't surprise me for something like that to be less objective, which is why I didn't buck it much.  I prefer knowing this, though.